Retirement Roadmap

Avoiding the IRMAA Trap: Strategic Income Planning for Medicare

• Mark Fricks • Season 3 • Episode 22

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The Income-Related Monthly Adjustment Amount (IRMA) is a Medicare surcharge that can significantly increase your healthcare costs in retirement based on income from two years prior.

• IRMA affects both Medicare Part B and Part D premiums, potentially adding over $500 per month per person
• The surcharge is based on your Modified Adjusted Gross Income (MAGI) from two years prior
• Income thresholds begin at $106,000 for individuals and $212,000 for joint filers
• One-time income events like selling property or Roth conversions can trigger IRMA
• Higher premiums due to IRMA do not provide better coverage - everyone gets the same benefits
• You can appeal IRMA if you experience life-changing events like retirement or divorce using Form SSA-44
• Strategic planning between ages 59½ and 64 may be critical for minimizing IRMA in retirement
• Qualified Charitable Distributions (QCDs) and donating appreciated assets directly to charity can reduce MAGI
• Tax laws affecting IRMA change regularly, requiring ongoing review of your retirement strategy

Schedule your complimentary consultation at masterplanretire.com or call our office at 770-980-9262 to create a holistic retirement plan that addresses these hidden costs.

Have a topic or question you'd like Mark and Evan to address in a future episode? Email us at info@masterplanretire.com or call 770-980-9262.

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Advisory services offered through MasterPlan Retirement Consultants, Inc., a Registered Investment Advisor in the state of Georgia. Insurance, tax and commodities services offered through Fricks and Associates, Inc. dba MasterPlan Retirement Consultants.  The aforementioned are affiliated companies.

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Evan:

Who the heck is Irma and why is she so mean? Hi folks, welcome back to Retirement Roadmap with Master Plan Retirement Consultants. My name is Evan. With me, as always, retirement planner Mark Fricks. No, it's not your great aunt visiting from out of town. During the show, we're going to discuss Medicare's surcharge, the income-related monthly adjustment amount, otherwise known as IRMAA, as well as Medicare changes that may be coming in 2026. IRMAA Mark is an income-based Medicare surcharge that kicks in if your income from two years ago crosses a certain threshold. 2025 premiums, for example, are based on 2023 income. Why is this important?

Mark:

Well, a couple of things. Number one is when you leave a company. I would bet two years ago you made pretty good money and now you're retired, but you're going to pay a significant amount more for your Medicare.

Evan:

Part B. That's right. We're going to get into a lot of details about IRMAA, what to look out for things to consider, especially as you start to think about your retirement planning, Because we know there's a lot of retirement strategies that are going to fluctuate your income in a year and that can directly influence how much you're paying in IRMAA. And we'll look at the table a little bit as well and see okay, how much does it jump, depending on what your income level is?

Mark:

And the sad thing is there's so few advisors out there that say they're planners and say they're retirement planners, that don't even realize that exist, and all of a sudden they trigger these big premiums for one, two, three years and the clients are like why'd this happen? And the advisor's like I don't know, and it just yeah. That's why you've really got to make sure you work with a retirement planner that understands all the aspects.

Evan:

That's right. Even a one-time income spike, like selling a business or doing a Roth conversion that can trigger IRMAA, lead to significantly higher monthly premiums for both Part B and Part D. And, like you said, I mean we've got to consider that we're huge proponents. We've talked about tax strategies a lot on this show. We're huge proponents of Roth conversions. They're super important, but timing and strategy is just as important as getting that money to tax-free accounts, especially when you don't realize the areas that you could be affecting. Like you like to say, what you don't know is going to hurt you.

Mark:

Well, and that's why you can't put it on, set it and forget it, right? Right, because every year is different, like you just mentioned a minute ago, and so you have to look at every year in its own tax year, right, what I've taken out, what I'm going to need to take out, and that's why I prefer looking at the tax strategies toward the end of the year. We kind of know what you've spent, things like that, but it's not a have to thing, but it can certainly help.

Evan:

Well, it's better to look at the end of the year, especially if you're looking backwards and being like, oh, I shouldn't have done this earlier. I need to cut back on the last few months of the year. It's kind of like when you've got a lease on a car and you've got X amount of miles and you're on year three and you're like, oh man, we're getting real close to that limit.

Mark:

Here comes the bus.

Evan:

It's time for Uber for a little while.

Evan:

So the surcharge I did mention, there are two separate ones. You pay more for Part B directly to Medicare and for Part D, you still pay your base premium to your insurer, but the IRMAA surcharge is paid separately to the government. Another interesting consideration is that IRMAA thresholds used to adjust for inflation, but some were frozen for years and the highest income tier won't adjust until at least 2028, so making strategic income planning even more important than ever, because you know, once 2028 comes, if you're in those higher tiers, you are going to pay more regardless. So again, I want to review. The 2025 IRMAA is based on your modified adjusted gross income from 2023, always two years prior. Medicare Part B 2025 standard monthly premium is $185 per month. That's a 5.9% increase from the year prior and, it's safe to say, most years it goes up, although we did have a drop a couple of years back, if you recall.

Mark:

Yep, yep, due to. Without getting into the weeds, they look at the overall cost of the Medicare program, specifically Part B, and then they kind of take some kind of an average across everyone that's on it, and there was some drug that came off this really expensive list dropped down to really, really cheap, and so many people were on it. It actually caused cost to go down a little bit that year. So nobody got an increase. I don't think they got a decrease, though. Does it ever go backwards? I don't think so. I don't think so, but at least not an increase.

Mark:

But it's just another one of those hidden taxes that it seems like we find a new one every week. We teach a great tax class and it's getting longer every time we teach it because we find something. We call them stealth taxes. This is one of those stealth taxes that, unless it bites you, you don't realize it and it's probably, I'd say I don't know what the percentage is, but it will bite a lot of folks, especially that first year or two of retirement. So got to be aware of it. There's not much you can do about it, that first year or two if you were making great income and now you're making less.

Mark:

But it can get, as you'll say in just a minute, significantly higher.

Evan:

Yeah, absolutely, We'll look at the table and some specific bracket changes, but again, the standard monthly premium being $185 per month Per person, per person, right. So if you're a couple, consider that the brackets can increase Part B monthly premiums by as much as $443.90. When you add in Part D, which can be a surcharge, up to an additional $85, you're breaking $500 a month extra per person within the couple Over $1,000 a month.

Mark:

That is so ridiculous. And hey, I understand if somebody's making Warren Buffett money, or even $400,000 or $500,000. But you've got folks that are not making that much money but yet they can trigger that again and, because it's a surprise, it hurts for at least a year or two right and we're going to discuss a little bit more too about income planning.

Evan:

But the majority of your tax bracket in retirement, the majority of the growth or the heightened bracket of that, is because most of us are getting our income from tax deferred accounts. So we're building up that tax bracket just to make our ends meet per month. So we're seeing that IRMAA affected there. So Medicare recipients will face higher Part B and D monthly premiums in 2025 due to IRMAA if they reported a 2023 income of $106,000 on an individual tax return or joint $212,000. Now, joint, that doesn't sound like it does sound like a lot of money, but it really doesn't take long to get there, especially if you're looking at some bigger movements, maybe in that year, like I said, selling a house rental property business, something like that.

Mark:

And you got a couple working and they both retire at the same time and they were both executive level type of incomes 200,000 plus, not that much. Then we had a couple of clients that got like a lump sum payout bonus at retirement. That was another $25,000, $50,000, whatever it may be. And you say, yeah, I'd love to have that. Yeah, I would too. But it also, you know, with every action comes a what equal and opposite reaction. That's right. Or maybe a better way to put it is with every action comes a tax, right, right, so it's just. It just piles on top of everything else and again, what you don't know, like you said earlier, can hurt you. And that's why we try to cover every aspect of every client we work with. We don't want surprises. Now maybe we're willing to accept it for a year or two, but if we know it's coming, we can plan for it. But all of a sudden you get that Medicare Part B bill and that Medicare Part D, which is the drug coverage, and it's a shock and a surprise.

Mark:

You may have to take more money out of your IRA to plug some gaps. Now you've just thrown yourself into a deeper hole. So it's just this compounding effect.

Evan:

So just a couple of numbers. I did mention individual filers $106,000 or less, joint $212,000 or less, and that is Part B at $185,000. And then there's no Part D surcharge. If you go above $106 or above $212, then your Part B jumps from $185 to $259 per month, and then you've got an extra $13.70 on that, part D that's both per-person numbers, that's right.

Evan:

That's right Now. If you're above $133K as a single filer or above $266K as a joint filer, then your Part B has jumped up to $370K already. The next tier above $167K single, above $334K joint, you're up to $480K and $0.90. And again, joint, let's go ahead and double that Above 200,000 for single or 400,000 for joint, that's $591 and 90 cents. And the highest is 500K or more for single filer and 750K or more, that's 628 and 90 cents per person. Now that you know, if you've got that much income, then maybe that's not your biggest deal. But again, some of these higher brackets might seem unattainable but they're really not when you look at certain life events.

Mark:

Yeah, absolutely. And you've got to remember too, again, it's going to continue. Is it at least two years that we'll continue? For that's right. So that's two years, that's going to continue. And then if you decide, let's say you're in retirement, you want to start doing some Roth conversions, that Roth conversion counts right toward that number. So you got to be careful how much you convert, not just because of your tax bracket but because of our friend Irma, right? And so it's just. Again, it's just multi-prong. We use the illustration sometimes of this 500 piece puzzle, all these pieces coming together and either you're missing one or one doesn't fit right and it messes up the rest of the puzzle. It's just, it just compounds upon each other. So it's again very important that you understand, you know what's happening. And, by the way, we're not including cost of supplemental, the supplemental policies which you know I don't I've not priced those lately, but I'm sure they start probably at maybe $75 to $100 a person.

Evan:

Yeah, right To reiterate that surcharge on IRMAA for the Part D is in addition to what you're already paying your carriers.

Mark:

So just great information, and information that's so timely to make sure folks are aware of what's going on. And again, I know a lot of people try to educate themselves. Say I'm prepared for retirement, I've read, I've Googled. But if you don't know what to Google, you don't necessarily know how to find what the problem is in your situation.

Evan:

That's right. So there are ways to avoid IRMAA. You can request a waiver If your income is dropped due to a life-changing event like retirement, divorce or death of a spouse. Just be sure to file form SSA-44 and provide documentation. Now that's huge. A lot of retirees don't consider that and so, like you said, if they're earning a salary and all of a sudden they go into retirement two years later, their big salary toward probably the highest they've earned, or at least close to it, in their life at the end of their career, their IRMAA is going to be based on that income two years prior. So you can request a waiver. The surcharge, again, isn't permanent, as you mentioned. It's recalculated annually. If your income comes back down, so can your premiums in future years. So here are three different ways to appeal to IRMA. One, you can request a new initial determination from Social Security. Two, you could submit form SSA-44. And then, three, call the Social Security Administration, that is, if there's anyone left to answer the phones directly.

Mark:

Leave a message.

Evan:

Yeah, and I actually have their number 800-772-1213. We'll see if that line is still in existence within a few months.

Evan:

I would recommend pursuing all three. If an IRMAA appeal is denied, don't panic. Multiple levels of the appeal process provide additional opportunities to make your case. But lastly, there are some important deadlines for appealing to IRMA. You're only given 60 days to request an appeal. The 60-day clock begins when you receive your Part D IRMAA letter. The Social Security Administration assumes you will receive your letter five days after it's time stamped. How do you like that one?

Mark:

Let's take a look at Social Security and how they're behind the post office and how they're behind that's right. Yeah, good luck with that.

Evan:

So you are on a time limit. Do not wait. Be proactive in this. If you think that you can get an adjustment to your IRMAA or have it dropped altogether.

Mark:

And that's the Part D letter?

Evan:

Yes, yes, part D, which makes sense because they've got to go back and forth with the provider, probably a little bit as well, but I'm assuming that. Oh, here's another interesting thing to consider Higher premiums does not mean better coverage, because Irma is a surcharge that helps fund Medicare, not a ticket to extra benefits. Everyone on the same plan gets the same coverage. Listen, a financial services professional can help you plan ahead, manage income strategically and avoid unnecessary unnecessary surcharges, thus putting more control and more money back in your hands. Speaking of financial professionals, we are retirement planners. Folks, go to masterplanretirecom. You can schedule your complimentary consultation with us. In fact, there's a button you push on the website that'll take you directly to our calendar to schedule your complimentary consultation with us. We'll run a series of reports, get a 10,000-foot view of your own retirement. Where are your strengths, where are your weaknesses? Where do you need improvement? How can we make your money last your entire lifetime and create a holistic retirement plan? Again, that's masterplanretiredcom, or call us at the office, 770-980-9262.

Mark:

And, by the way, if this IRma discussion has triggered something in your mind saying what else do I not know? Right? So you know this. This, uh, complimentary consultation, uh, we're going to look at all aspects of what's going on now. I'm not saying we're going to create a plan from day one, but we will start with exploration.

Mark:

Uh, talking about your retirement, your, you know your situation, things like that, and we may bring up some items. Well, this might be something we're going to look at. This might be something else we want to look at in your situation and things like that. And we may bring up some items. Well, this might be something we want to look at. This might be something else we want to look at in your situation. And then we run the reports. We may even run some extra reports to illustrate some of these other situations. Yeah, absolutely so. It fits you, it fits where you're at, what your goals are, what your worries are, your concerns. So, take advantage of that. We have many, many people that take advantage of that every week and we are delighted to be able to do that for you. And, as Evan likes to say, even if you just take those reports, that knowledge you gain and walk away. We're glad we were able to help you. We love new clients but at the same time we love helping folks as well.

Evan:

That's right, yeah, and we really are education first with our clients in the entire planning process, but especially in our prospective clients. We want them to understand how we work, why we do the things that we do, and, especially if we're going through a retirement plan with you, we want you to know why we're recommending certain things and so that not only do you trust us because you understand it, but you have that peace of mind for the rest of your retirement as well.

Mark:

And that's kind of the purpose of these episodes. Yeah, Is that education? What are we looking at? How does this work? How does that work? What are some of the different? So many different. Various tools are available for you for retirement.

Evan:

All right. So how do we avoid IRMAA? So blanket statement lowering your modified adjusted gross income is the best way to avoid IRMAA, or at at least to reduce it. So there are some key ways to do that. For example, donating appreciated assets directly to charity can avoid capital gains taxes and, in turn, lower your modified adjusted gross income. So this is. These are appreciated assets like mutual funds, ETFs, stocks. Cash does not count. You can't sell them first, because then you've already captured that capital gain. It avoids the capital gains that the donor would otherwise pay if they sold the asset. Guess what? ? Q? s also count qualified charitable distributions from IRAs up to $100,000 a year.

Mark:

This may help reduce your current income yeah, I think the rule is that 70 and a half, 70 and a half, you can start, seven and a half you can do a QCD. This is basically from an IRA qualified account directly to a 501c charitable ministry, whatever you want to support, and you can do any amount up to a hundred thousand and you don't pay taxes on that money coming out. So you've got some money out of your IRA but you've also given to that charity you love to give to. I just had a discussion with a client a few weeks ago that it has turned 73, yeah, yeah, 73 this year. So she has to start taking money out.

Mark:

So we talked about that and she's like well, I give to my church every month. I said, well, let's give straight out of your IRA. You're not going to pay tax on that money and it counts towards your required minimum distributions and so, just based on the amount of money she's given, they're probably going to save $2,000 a year in taxes. Is that a lot? It is to me. And it doesn't count toward, of course, their Medicare Part B increases and Medicare Part D or IRMA, as we're talking about.

Evan:

Now this is fine line with every part of this conversation. I mean, this is also assuming you don't need those withdrawals for income. But, for example, you gave the example of donating to a church tithing. If you're tithing from your Social Security check or your pension check, consider tithing from your IRA instead. That way you get the tax cut, the tax break there, and just be a little bit more strategic with how you're making those withdrawals. But if you need those RMDs or you need those IRA withdrawals, then you're in a little bit of a tighter situation, which is why planning ahead over time and creating a strategy is so vital.

Mark:

Well, and also, as you mentioned earlier, stocks or whatever that may have a high capital gains. We have several clients that have stocks that they've had for 25, 30 years and their capital gains maybe they paid $100,000, they're worth like a million. They almost can't sell them Because taxes on a $900,000 profit is huge. But what about? Every year you donate some of that stock to that charity and so you don't pay again. You don't pay capital gains because it's a gift to that charity. The charity doesn't pay gains on it when they sell it because they're a charity. So again, just so many people are not aware of this and when I tell them they're like their jaws kind of drop open why haven't I been doing this? I said, well, you didn't call us.

Evan:

Also another interesting consideration if you're still working and you have earned income now, this is age 65 is when you would start receiving Medicare. If you're still working and have earned income, making tax deductible contributions to a retirement account will reduce your modified adjusted gross income, potentially reduce or avoid IRMAA. Now, if you're a 65 and you're trying to reduce IRMA and also put more money in tax-free accounts, but then you're simultaneously putting into a tax-deferred account, that's a little bit of a balancing act.

Evan:

Both of these aren't necessarily saving you. It's a very niche situation for it to really be a huge benefit, but again you've got to discuss that with them.

Mark:

Yeah, I think what we look at in that situation is where are you at in 10 years and 20 years? Where's the tax rate going to be? Where are you going to be? You know, and so we just have to be careful. And are you expecting maybe a big inheritance in the future? You know that may add to your taxes in the future. If you inherit an IRA, you know, from a mom, a dad, an uncle or whatever, then you're required to take money out of that over a 10-year period. So if that's coming, maybe we want more. We're willing to give up some tax savings here to get more money into Roths so we have less of an issue there. I mean, it's just this cascading, you knowading type of situation as we allude to a lot. Maybe it's a great time to talk to your parents about getting some of that money out of that IRA into a Roth, or send your parents to see us.

Evan:

We've got some other episodes. We have not even gotten into the conversation of why tax diversity is so important today, but you need tax diversity. As Mark likes to say, taxes are currently on sale, meaning they are historically low. Whether it feels like they are or not, our tax system is at a historical low bracket, or all the brackets are historically low, excuse me. Conversions are huge right now and again. We love them, but processing Roth conversions before Medicare coverage begins and or during gap years, which is between retirement age and your RMD age you've got to have a tax strategy on how to do that appropriately. If you can, the earlier you start the better. If it can be before age 65, then do it. Even if you know you're hitting that two-year window of when Irma will hit at 65, it's still worth it to start ahead of time, strategically, incrementally, because we need that tax and birth certificate.

Mark:

And again you can go back and file a waiver.

Mark:

You know, try to get that.

Mark:

But I think that's why it's so critical between ages of 59 and a half and 64 of really being aggressive in Roth conversions, because you're still not on Medicare, but at 59 and a half and 99% of the cases, you can roll over most or all of your account at work, even if you haven't left into an IRA, which makes it convertible. Now, typically, a 401k is not convertible to a Roth. You have to get into an IRA first. So now we've got it in an IRA, we've got a multitude of different investments to look at which your 401k does not. But more importantly, or just as importantly, it gives us that window of between I don't know three and a half to four and a half years to be more aggressive on the Roth conversion. So and if you've retired by 59 and a half, it's even better because your income may be a little bit lower, right, so you could do maybe even be more aggressive. So again, it's all a timing, it's a strategic decision, it's communication with our clients to see where they're comfortable from a tax standpoint.

Evan:

We talk about tax loss, harvesting a lot when you've got an account that's down, maybe sell it while it's down, so you're minimizing your capital gains taxes. But another concept is the exact opposite of that tax gain harvesting, realizing gains and deliberately paying taxes now, while the taxes are low.

Mark:

Yeah, and that's again. That's something else to look at. Capital gains are certainly low. They've talked about making capital gains rates equal to whatever bracket you're in, so that could greatly increase it. It's also important this is really another subject but if you have something that has a lot of gains in it, if you will pass that on to beneficiaries through a will or a trust as opposed to gifting it, then they get a big tax break. They don't pay capital gains on that item. So, again, estate planning comes into it as well, that's right, Absolutely so.

Evan:

Like your personal situation, folks, tax laws can and do change, potentially leading to new ways to reduce taxable income and avoid IRMA For your situation. Every situation is unique unto itself and please seek a retirement planner to help create a holistic plan for your own retirement.

Mark:

Yeah, and I love just what you said. It does change. We talk about how tax laws are written in pencil, and so every two years there's somebody new in Washington, right, there's a presidential election every four years. The House is every two, the Senate's every six. New people in the power shifts from one side of the House to one side of the Congress to the other. Always changes, so you really have to keep an eye on things Again. That's why our retirement roadmap is not static. It is a living, breathing document, so to speak. So we appreciate you being with us today. I hope this is helpful. I hope Irma triggered something. Hey, I didn't know that. I need more help If you do, masterplanretirecom, and until we see each other again, plan well and prosper, take care.

Speaker 3:

This was Retirement Roadmap Radio with Mark Fricks of Master Plan Retirement Consultants. To schedule a complimentary consultation, go to masterplanretirecom or call 770-980-9262. Thanks for listening and remember plan well and prosper.